Partner is at the Crux of Nexus deal

Nexus Energy
is set to surprise the market with a cut-price partnership deal for its $1 billion Crux gas liquids project but managing director Richard Cottee says it will still create value for shareholders by ensuring the venture proceeds.

Under the long-awaited deal, which is in the final stages of negotiation, the partner would likely buy a 35 per cent slice of the Timor Sea project, cutting Nexus’s stake to 50 per cent.

In contrast to a failed $255 million deal with Mitsui in 2008, the buyer would not be handing over any cash to Nexus, Mr Cottee said. Rather, Nexus would forfeit an up-front payment in exchange for the partner covering Nexus’s equity share of the project funding when it falls due.

While investors may be taken aback by the terms, Mr Cottee can point to his track record at Queensland Gas Co, which he took from a $20 million coal seam gas junior to a $5.7 billion player by the time BG bought it in a friendly deal in 2008.

“Most of my deals at QGC haven’t been straightforward but they certainly were wealth-creating," Mr Cottee told The Australian Financial Review. “We don’t have any need for cash at the corporate level; we do have a need to commercialise Crux. Fifty per cent of a developed Crux is worth more to the company than 85 per cent of an undeveloped Crux."

Mr Cottee has saved Nexus from near-bankruptcy since he joined the company last May, restructuring about $110 million of subordinated notes, refinancing debt for the Longtom gas project in Bass Strait, reducing costs and raising $122 million in new capital.

He is now focused on finding a partner for Crux and meeting a December 31 deadline for a final investment decision (FID).

“The major focus in the first year was repairing the balance sheet," Mr Cottee said. “That is now totally and utterly done: there is no downside risk left with the stock."

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Nexus was caught in the wave of selling that swept over the resources sector during the past two months, and its share price lost 31 per cent of its value in that period.

At 30¢, the shares traded at a 31 per cent discount to the carrying value of Longtom and allowed no value for Crux, said BBY analyst Scott Ashton. He values Nexus at 70¢ to 80¢ a share and has a “strong buy" rating on the stock.

However, UBS noted last week that while the upside in the stock was “material", so was the risk. It has no formal recommendation on Nexus.

Mr Cottee won’t put a date on concluding the Crux deal, but said he was “very confident" of reaching an agreement with one of two parties, based on roughly the same terms.

“The first one at the finish line gets a guernsey; we’ve still got optionality," he said, hinting that the investor might be a financial party that could bring in other partners.

“I’m obviously trying to do it yesterday," Mr Cottee said of the deal.

A costly arrangement reached in November with Royal Dutch Shell gives Nexus a crucial three-year extension to the date when it hands over the rights to the lucrative liquids in the field.

However, that agreement will collapse unless an FID is made by the end of 2011.

Mr Cottee indicated that with two rivals negotiating, the deadline should be met. “We have got to get to FID by the end of this year and I can’t be held to ransom on timing," he said.

Several hurdles remain, however, including the refusal by Osaka Gas – a 15 per cent partner in Crux – to approve the deal with Shell. That could be solved by the farm-in partner offering to buy out Osaka Gas at a slight profit, Mr Cottee said.

Osaka Gas, which bought its 15 per cent stake in Crux for $75 million in 2007, is understood to be uncomfortable with the timing pressures and has several options for the funds it has tied up in the venture.

A corporate bid could not be ruled out for Nexus, said BBY’s Mr Ashton, pointing to Shell’s need to have certainty over Crux gas to feed into its Prelude floating liquefied natural gas venture.

Mr Cottee’s priority is to conclude the Crux deal before starting to look for a partner for Longtom.

He has hired engineering firms to review the project, for which design work is complete and $60 million of long-lead items have been warehoused.

Nexus has used Lazard as an adviser from time to time but Mr Cottee said he was comfortable overseeing the path to a final investment decision. “Generally speaking I’ve been behind the back of a shed a few times myself; I don’t think I’m the most inexperienced person," he said.